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Central Bankers Stoking the Inflation Fires, Whilst Academic Economists Worry about Deflation

Stock-Markets / Financial Markets 2010 Aug 15, 2010 - 12:00 AM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleThis week the Bank of England Governor Mervyn King realised that his attempts at talking inflation down have failed and that now 8 months on he is looking rather foolish by continually stating that high inflation is just temporary, where even the mainstream press that had been lapping up the mantra are now no longer taking him seriously, so now the Governor is suggesting that inflation will remain above the 2% target level for the whole of 2011 (current CPI 3.2%, RPI 5%) which translates into watch for UK CPI to go above 4% and and RPI above 6% during 2011, in line with my expectations since early May.

Meanwhile the BoE pumped out its quarterly Inflation propaganda report labeled as a forecast to try and get ordinary folks and business to buy its story so as to make the outcome of 2% inflation and trend economic growth more possible.

Most people remain in denial of the Inflation Mega-trend as witnessed by a continuing debate between deflation or inflation when the facts are that of accelerating inflation. Surprised by out of the blue food price crisis? Read the Inflation mega-trend ebook (FREE Download).

Deflationists remain just as delusional today as when I wrote in November 2009 (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ). Instead of realising that they are wrong and do something to save themselves and their readers from going broke by holding cash and invested in bubbles destined to burst such as government bonds under the weight of ever escalating money printing or quantitative easing, 1, 2, 3, 4, quadrillion, they instead ignore CPI inflation (unless its falling) and come out with nonsense such as pricing assets in terms of the gold price to imply deflation is taking place when peoples food baskets i.e. the REAL WORLD show INFLATION is accelerating away from them , or in some cases implying that inflation is really deflation in disguise because of loss of purchasing power, which is the whole point of what inflation IS ! Where prices rise to erode the purchasing power of your savings and earnings! I hear weak economies mean deflation looms, well try telling that to Zimbabweans!

Do a simple personal inflation test, dig out your credit card statements from 1,2,3 years ago and see how much your food and energy bills have gone up and then you will know how much inflation has taken place during a period of perma deflation mantra. Never mind the amount average food baskets are destined to rise in price going forward!

LISTEN , protect your wealth from the inflation mega-trend by hedging in scarce resources such as Gold, Silver, Agricultural and other Foods, metals, energy, stocks of dividend cash cows, emerging markets and more as elaborated at length in the Inflation Mega-trend ebook, now 7 months on we are further along the inflation mega-trend with no signs of reversal into the phony debt deleveraging deflation mantra that we have been hearing about for several years now that has FAILED to materialise, there IS NO DEFLATION, the deflation mantra will continue right up to the point where the wage price spiral kicks in as it slowly dawns on the academic economists / perma crowd that their theories are just as bankrupt as most of the western economies actually are! But by which time your savings will have been wiped out by following the perma deflationists mantra of "cash is king". Yes I am being blunt because sometimes you have to be to knock some sense into people!

Meanwhile David Cameron's government scrapped another quango, the National Audit Commission, that's 2000 bureaucrats set to disappear in a puff of smoke, most of whom will be replaced by the private sector. The next 6 months are crucial for the UK to see if the coalition government is able to deliver the promised cuts and deficit reduction targets, if not then the UK will be firmly back on the trend towards bankruptcy and hyperinflation that Labour had set it up on with sterling following the dollar to its final destination. Fingers crossed that UK official debt stabilises at 70% of GDP (and the unofficial debt and liabilities at 350% of GDP).

In the U.S. the prospects for QE2 is coming as a surprise in many quarters when it has been obvious since the first print run that once started money printing cannot be stopped whilst large budget deficits exist, which where the U.S. is concerned probably means continuing for the next 10 years at least as the U.S. is going to milk its reserve currency advantage to the fullest.

Germany Booming

German Q2 GDP data came in at 2.2% annualised to 8.8%, another surprise for the mainstream press and analysts that had penciled in growth of between 1% and 1.2%, where even the likes of Martin Wolf of the FT has consistently been making bearish statements such as this -

Financial Times, Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery".

Germanys economic boom is the flip side of the PIGS sovereign debt crisis as I have been mentioning since at least early early May 2010 (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge ) and in my last opportune newsletter (09 Aug 2010 - UK Economy GDP Growth Forecast 2010 to 2015).

Bottom line - The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth.

Stock Market

The Dow having reached my long-standing target of 10,700 spent 7 trading days attempting to hold the level and break higher which it repeatedly failed to do, finally support giving way from the open on the 11th of August. The most recent price action has attempted to hold 10,250 with the Dow closing at 10,303. However the Downtrend from 10,700 targets 10,100 as a possible low point for the current swing so the most recent action can be seen as an attempt at working out the oversold state before another short down swing to form a base in the 10,100 region to again target a break above 10,700, my in depth analysis remains pending time.

Pakistan Floods

Pakistan Floods put everything into perspective, 20 million face losing everything in a disaster of biblical proportions.

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By Nadeem Walayat

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15 Aug 10, 07:47
how much "inflation" do central banker's really create vs. commercial banks

seems to me at least in the USA....regarding the "credit supply"....the fed DOESNT create much inflation.....compared to the commercial banks...i.e lenders

yes there actions stopped a deflationary collapse..and they may have "set the stage for"...cept for the little tibbit about incentivizing parking excess reserves at the fed for a risk free chunk of change..but they can only set the interest rate.....and create an alphabet soup of liquidity programs....but they can't or won't directly effect the BANK LENDING INTO THE ECONOMY.

banks aren't increasing lending...commercial bank lending continues to contract.....i imagine loan loss reserves are very high ....for another wave of foreclosures and CRE well as a possible memo given to CEO's that this was your last bailout for a while.

so really the central bankers are trying to stoke asset price inflation..but the country's that could sustain higher asset prices may be the one's where the domestic macro economy is stronger as foreign investors and their capital flows sort this out.....but the only "US" company's worth investing in ...are the one's that do most of their business in foregin lands that pay out high dividends. But even they will be subject to the overall swing of the domestic markets.

US equity markets should see foreign direct selling of equities into country's with stronger fundamentals and country's with better debt structures. It's clear that the macro economy's emporer of recovery is down to his skivvies already.

A NEW large handout i.e stimulus in the form of gift cards....and continually extending unemployment benefits could help keep the economic indicators out of double dip talk for another several months and thus allow the us stock market to continue to reap the rewards of the global financial liquidity surplus...but it seems there is no appetite to use these means to kick the can down the road. And obviously this is not a recipe for a strong economy and jobs creation but kickin the can down the road is something the political one trick ponies should have down pat. stimulate the damn domestic consumption economy or captial flows should go to stronger foregin equity markets.

Alfred Warschauer
15 Aug 10, 15:57
Bernanke's "Mein Kampf"


Your hyperinflation hypothesis is supported by this article from Faber's bulletin in 2006

The one you are looking for is "Toward's Hyperinflation"

Loads of past Fed publications have forewarned of what has gone on so far. Faber calls them Bernanke's "Mein Kampf", because just like Hitler's version, they make it quite obvious what his intentions are i.e to inflate and inflate until the bitter end, using activities that may be for the Fed illegal to indulge in too



16 Aug 10, 09:30
Kress cycles

Do you have thoughts on the work done by Samual J Kress in regard to his cycle theory?

16 Aug 10, 19:18

I'll write a book one day on analysis and forecasting.

But basically, I concluded during the early 1990's that when taken INDIVIDUALLY, all technical analysis, economic indicators and theories cannot conclude in anything more accurate than a 50/50 coin flip.

And so far I have not had any reason to change my point of view.

16 Aug 10, 19:22
US Inflation

You only have to look at the purchasing power of the currency to see how much inflation the fed has created over the last 100 years. The dollar has lost 96% of its purchasing power ? Thats a lot of inflation !

William K
19 Aug 10, 21:49
12,500 then what?

Hi Nadeem,

I love the Blogosfear term, you are the man.

I'm believing in your call for 12,500, but then what?

I'm dying to go short this market for demographic baby boom reasons, but don't want to jump the gun.

Do you think the baby boom peak spending theory is valid (i.e., 2010 is the final spending peak for the US baby boomers and then down until 2023), or are we on to a new high in 2011?



19 Aug 10, 21:50


Just wondering if the next in depth Gold analysis is heading our way shortly. Surely must be bumping its way up the queue?



19 Aug 10, 22:06


I have a long list of markets to analyse, which given the amount of effort required usually means I can only do these at weekends.

However my primary focus is the UK housing market at this time as I need to answer the question when should I buy.

That and I want to know what GBP is going to do, those are ahead of both gold and the dow in terms of wanting to know what they will do next.

So my next forecast will probably be on GBP as the UK analysis is a long way off froma final conclusion.



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